- Media headlines on May's global consumer price reports stoked inflation fears.
- High inflation in a few countries isn't disastrous. A global investor properly thinks about inflation as a global phenomenon—inflation and disinflation are exported around the world, keeping aggregate prices in check.
- Keep in mind, the most severe inflation is taking place in a relatively small portion of the world economy and doesn't constitute a global crisis
- Inflation, as measured by long-term interest rates, still remains historically benign.
Governments around the world announced new consumer price data for May. In a stunning display of solidarity, various media headlines declared the new data showed "surges" in prices.
US Consumer Prices Surge as Energy Costs Spike
By Staff, AFP
Brazil Sees Inflation Surge in May on Rising Food Prices By Alastair Stewart and Rogerio Jelmayer, Dow Jones Newswires
Hungary Inflation Surges, Rate Hike on Cards
By Balazs Koranyi, Reuters
Mideast Struggles to Contain Record Inflation Surge
By Thomas Atkins, Reuters
Interestingly enough, inflation rates ranged from a 25.3% annual consumer price increase in Iran (indeed a "surge") to a 4.2% annual headline increase in the US, though the core rate only rose 2.3% (can we suggest "soft swell?"). While we could spend pages deciphering the subtlety of the gradations of the term "surge," we can't help but notice the ominous overtones associated with these inflation reports.
Should we fear countries with 15%, 18%, 25% inflation rates? Will they somehow contaminate the global economy like some sort of radioactive ooze? Some believe so.
The New Stagflation: An Asian Export
By Stephen Roach, Financial Times
Yes, inflation in parts of the world is somewhat of a concern since prices for some goods have been rising at a fairly fast pace. But high inflation in a few countries isn't disastrous for the entire global economy. Like the above article suggests, inflation is now a global phenomenon. But it's not just inflation that gets exported—disinflation from other nations does too, helping keep aggregate prices in check.
Keep in mind the most severe inflation is taking place in emerging economies, especially in Asia and the Middle East. But these countries make up a relatively small portion of the world economy, so rapid inflation in these areas just doesn't constitute a global crisis. In fact, a look at the numbers compiled by the International Monetary Fund reveals US GDP is the largest component of global GDP at $13.8 trillion—over 25% of global GDP. China stands at $3.2 trillion. India $1.0 trillion. Indonesia $0.4 trillion. So while it's quite alarming for Indonesians to swallow a 10.4% annual increase in consumer prices, it's not panic time for the global economy. And as long as the global economy continues to grow, short-term fluctuations in prices will likely dampen.
Further, government statistics on inflation are notoriously prone to inconsistencies, biases and revisions. A better measure of the market's expectation for inflation is long-term global interest rates. They've ticked up slightly in the last few weeks, but are coming off extremely low levels and remain historically benign—telling us the market doesn't view global inflation as a major concern. So why so much focus on higher inflation right now? Because high oil and food prices can be such headline grabbers. But in a world of zero inflation, you'd still get half the prices moving higher and half moving lower. And despite oil's starring role in headlines, overall prices aren't much higher than they were a few years ago—we just forget to notice those prices, like electronics, that continue falling. When in doubt, remember if the market doesn't fret inflation, you shouldn't either.